Hot on the heels of the very first REIT IPO listing this year, that of Elite Commercial REIT (SGX: MXNU), comes a second REIT IPO, this time from the USA.
The new REIT, named New Hampshire US REIT, is interesting because of the asset mix within its portfolio. The properties consist of 18 that are in the grocery-necessity category and 4 in the self-storage category, for a total of 22 properties.
I read through the prospectus and would like to share four things you should know about this REIT.
1. Offer price and distribution yield
The offer price for the REIT is US$0.80 (around S$1.12), and it offers a projected distribution yield of 7.4% in 2020 and 7.6% in 2021. The offer is open from now till 12 noon on 10 March 2020. Trading will take place at 2 p.m. on 12 March 2020.
2. Strong sponsors
My colleague had written on important lessons he learnt from holding REITs for 15 years, and one of them is strong sponsors.
New Hampshire US REIT has two strong sponsors — UOB Global Capital, a subsidiary of United Overseas Bank Ltd (SGX: U11), and The Hampshire Companies, LLC.
The former is an originator and distributor of private equity, hedge funds and real estate products with more than 20 years of experience. UOB Global Capital has assets under management (AUM) of US$3.2 billion as of 30 November 2019.
The latter is a fully-integrated real estate firm with more than 60 years of hands-on experience in acquiring, managing, financing and disposing of real estate. Hampshire Companies has AUM of more than US$2.1 billion (as of30 September 2019) and is managing more than 17.5 million square feet of real estate.
With two established sponsors, investors can rest easy that the REIT will be well taken care of.
3. High initial leverage level
The REIT is expected to launch with an aggregate leverage ratio of around 37.0% as of its listing date on 12 March 2020.
This level seems rather high to us as the statutory gearing limit as imposed by the Monetary Authority of Singapore (MAS) stands at 45%.
Hence, most REITs try to stay below the 40% gearing level in order to give themselves some headroom to borrow if urgently needed.
At 37%, this means that New Hampshire US REIT can only add three more percentage points to its leverage ratio, thus constraining it from taking on debt to grow.
One of the key strategies of the manager for the REIT is to “seek to achieve portfolio growth through the acquisition of quality income-producing properties”. With such high gearing, the REIT may have to tap on the equity markets for fund-raising in order to conduct such an acquisition.
4. Income support
Source: New Hampshire US REIT’s IPO Prospectus
The prospectus provides a graphic for the distribution yield of the REIT with and without “top-up”.
The top-up here is also known as income support, and is usually extended to properties within the REIT that have yet to be completed, or may not have an optimal occupancy rate.
Investors need to take note that the distribution yield for New Hampshire US REIT will fall a full percentage point to 6.4% (for the forecast period 2020) if the income support is not included.
There are three properties that require income support.
The first is St. Lucie West Expansion which is undergoing asset enhancement works that will only be completed by the first quarter of the fiscal year 2021 (Q1’2021). An amount of US$1.798 million from the IPO proceeds will be used to top-up the rental for this property (US$1.1 million in 2020 and US$698,000 in 2021).
The other two properties are self-storage ones — Elizabeth Self-Storage and Perth Amboy Self-Storage. The former was only completed in January 2020, while the latter will only be completed in Q2’2020.
Both properties’ net operating income has yet to achieve a level equal to that of the other more mature, stabilised properties. Hence, an amount of US$4.72 million will be set aside from the IPO proceeds to provide income support for up to four years from the date of completion for the properties.
The REIT is raising an amount of around US$70.3 million from the IPO, of which a total of around US$6.5 million, or 9.3%, will be used for income support.
Get Smart: A recession-resistant REIT, but watch for that income support
Overall, it appears that the REIT has strong, stable characteristics of being able to weather economic storms and recessions by being in the right sectors (grocery, home improvement and self-storage). The presence of two strong sponsors also helps to provide peace of mind to investors.
However, of note is the section on income support — the stated distribution yield should remove the income support and be stated as it is, at 6.4% rather than 7.4%. The REIT manager has communicated to SGX that it will provide updates on the income support status and expiry, so this is an area we should closely watch.
Disclaimer: Royston Yang does not own shares in any of the companies mentioned.